KGI Securities analyst Joel Ng has upgraded Geo Energy Resources to “outperform” with a higher target price of 42 cents as he anticipates the company to have a record year ahead on the back of “resilient” coal prices.
“While we expect coal prices to soften in 2H2021, dynamics favour coal miners given the buoyant demand from India and China,” he says in an August 30 research note.
Ng also notes that there’s less risk of an oversupply-related correction for coal markets as environmental, social and governance (ESG) pressure has pushed capital toward clean energy, thus limiting rapid coal supply growth.
See also: Geo Energy revenue up on "exceptional" coal prices, seeks higher quota to tap "super cycle"
His rating upgrade comes after Geo Energy reported record revenue of US$220 million ($295.9 million) for the 1HFY2021 ended June, with core earnings of US$48.5 million for the period driven by volume and price increase.
Looking ahead, Ng forecasts the company will generate some US$247 million of free cash flows in 2021 and 2022, exceeding its current market cap of around $330 million. His forecast assumes coal prices of US$58 and US$50 per tonne for 2021 and 2022 respectively, with corresponding production volumes of 10.5 million and 11 million tonnes.
“The strong cash flows over the next two years will provide Geo Eenergy options to diversify via acquisitions,” he remarks.
He also notes that his production assumption of 10.5 million tonnes is 12.5% below Geo Energy’s application to increase production to 12 million tonnes in 2021.
Despite public perception that thermal coal is on a decline, Ng points out that data for Asia suggests otherwise. The region is expected to account for more than 60% of global electricity demand growth, supported by 150,000 megawatts of new coal-fired capacity built across Asia.
“The economic reality is that unlike in the US and Europe, Asia has a minimal supply of cheap gas for electricity, leaving coal as the primary supply over the decade ahead,” Ng explains.
His target price for Geo Energy has been raised from 14 cents to 42 cents. “Our fair value is based on DFC with a conservative set of assumptions: 1) 13.5% discount rate, 2) six-year mine life up to 2026, and 3) no terminal value,” he notes.
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Based on his forecasts, Geo Energy currently trades at an average P/E of 2.8 times from FY2021-2023, with an “above-industry” dividend yield of 8.7%, 5.8% and 4.6% for FY2021, FY2022 and 2023.
Shares in Geo Energy closed up 0.5 cents or 2.17% higher at 23.5 cents on August 30.
Photo: Dominik Vanyi / Unsplash
